Mihir P. Worah
Since the end of March, 10-year real yields, as measured by U.S. Treasury Inflation-Protected Securities (TIPS), have risen from deeply negative territory to around 0.1%. Real interest rates can rise for one of three reasons: The creditworthiness of a country is worsening, economic growth is improving, or inflation expectations are falling. S&P just revised its credit outlook on the U.S. government to stable from negative, so we can rule out the first reason. And while we would welcome the second reason, we believe the rise in real yields had more to do with a drop in inflation expectations. Indeed, 10-year inflation expectations, as measured by the difference between nominal and real yields, fell from 2.52% at the end of March to around 2.05% now.
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